Good day, welcome to Finnair's Q3 results call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mari Reponen. Please go ahead, ma'am.
Good day, ladies and gentlemen. I am Mari Reponen from Finnair IR, it's my pleasure to welcome you to this Q3 earnings call. I have here with me our CEO, Topi Manner, and our CFO, Mika Stirkkinen. Now I'd like to turn the call over to Topi Manner.
Yes. Thank you, Mari, good day to you all, welcome to this Q3 earnings call also on my behalf. Looking into the Q3, the main headline from our perspective is that the revenue and the number of passengers were up. The comparable operating profit was down on cost and cargo, related to cost, it was primarily driven by currencies and fuel costs. When we go forward in the presentation, our market shares continued to increase during the Q3. We carried a record number of passengers, altogether 4.1 million of passengers.
Bright point of the report is the strength of the European traffic. The Asian traffic did not develop as well as the European traffic, but it was very much ring-fenced to a couple of selected markets, most notably Hong Kong, that is impacted by the situation in Hong Kong. The cargo market is definitely being impacted by the global trade war. We see some significant yield pressure, just lately, we received global industry statistics that basically showed that the air cargo market is having the toughest operating environment globally in 10 years.
We certainly felt that, although our volumes still developed well and we are competitive on the cargo market, our market share is edging up in that part of the business. In travel business, we have been going through a challenging first part of the year, Q3 was more upbeat and we see a more positive demand, that is also an indication of more positive demand outlook for the remainder of the year for the travel services part of the business. In terms of key figures, during Q3, our capacity in terms of ASK went up to 9.5%.
Our revenue increased with 7.9%. The comparable EBIT landed at EUR 101 million approximately. The difference between Q3 last year and this year, the approximately EUR 17 million difference, is explained with fuel costs, where the sort of fuel price increase accounts for something like EUR 12 million, EUR 13 million. The US dollar discount rate. It's a little bit of technical item that impacts our maintenance cost that was closer to EUR 2 million, and the remainder is basically accountable to the cargo business.
Our customer satisfaction measured with Net Promoter Score was stable. We have been changing the measurement and the population a bit, and the 38 Net Promoter Score actually compares well with our peer group. We are developing positively on that front. Loads were up with 1.7%. The operating cost was up with 10.9%, and excluding fuel, 9.1%. We are basically growing costs faster than capacity and revenue. This means that scalability of cost is not entirely what we want it to be, and therefore, we will be putting more focus on cost efficiency going forward.
Cost is naturally also driven partially by the passenger numbers and then the passenger volume, as stated, was record high, increased with 12%. With that figure, just for the time being, we are actually one of the fastest-growing airlines in Europe. Having said that, when we take sort of a little bit sort of longer look forward, we see our capacity growth moderating, and then we will be more in line with the market growth during the upcoming years.
On the back of the high sort of growth on passenger numbers, our market shares have been developing well, both on Asian traffic as well as European traffic. In Asian traffic we have been growing during the last couple of years, that certainly was the case during Q3 as well. On those routes where we fly, our market share today is more than 6% that actually, when you are really carefully looking into the job, it is just by a thin margin higher than it has ever been. In European traffic to and from Helsinki, during the last couple of quarters, our market share also has been increasing notably.
What we see on the purple curve there is that our competitors starting from 2017, continuing during 2018, they increased capacity in the Helsinki market, and lately some of them have been pulling capacity out, and that is also visible in our market shares. This is a rolling 12-month market share, the odds are that the market share growth will continue also into the next quarters. When we look at the revenue development by category, the passenger revenue developed all in all pretty much acc ording to our expectations.
The strength of Europe was the positive, and then Hong Kong was negative on that one. Ancillary developed basically hand-in-hand with the passenger revenue. Although in terms of ancillary, we need to state that we have higher ambitions, and we want to grow faster in terms of ancillary income than passenger revenue going forward. As stated in cargo business, we experienced notable yield pressure as high as 15% on the unit price, but the volumes developed well, and therefore the impact on net revenue was -3.9%.
What we see lately in the cargo business is stabilization after a challenging summer. Then, of course, we are now approaching the most important quarter in terms of the cargo business on the overall during Q4. Travel services also developed hand-in-hand with passenger revenue and ancillary business, there I stated the indications of more positive outlook during the remainder of the year. When we look into the performance by traffic category, starting from North America, we have been increasing quite a bit of capacity to the North American traffic during this year, especially because of the opening of the Los Angeles route.
The capacity increase amounts to 28%. The revenue increased with 26%, and thereby the unit revenue RASK decreased with -1.7%. We think that this is a good result given the strong growth of capacity on this traffic category. We are happy, especially with the load factors of North American traffic. These routes have been finding their customer base, and of course, the load factor is also an indication that over time we potentially have a possibility to gear up the yield as well. European traffic we increased capacity with 5%, revenue increased with 10%.
When we look at the little bit longer track record for the European traffic, this is a strong performance on that part of the business. Domestic part was basically stable. In terms of Asia, when we look into the RASK figure, I think that there are two things worthwhile mentioning. First one is the Hong Kong that I already covered. The impact of Hong Kong to the RASK figure is 50%. Hong Kong accounts for half of the RASK decline.
Shanghai routes where we have been seeing a little bit additional competition, especially on the back of Juneyao Airlines opening a service from Shanghai to Helsinki, is another one impacting these figures much less so than the Hong Kong. With respect to Juneyao and the Shanghai route, what we would need to remember is that the Juneyao customers are providing feed for our European traffic, and therefore the positive side of that is visible in our European figures. When we look at the net of Juneyao, that is a positive for us.
This is also something that we will need to keep in mind when we consider these dynamics of Chinese competition at large to our business. We will need to be rather granular when we look into the development of the Asian part of the business. Moving on to page eight, when we look at where the growth is coming from during this quarter, it indeed came from the European business in terms of revenue. Some of you might remember that last year, during this time, there were questions around the performance of the European traffic, and now within the scope of one year, tables really have been turning in terms of the European traffic.
Looking into the cost, as stated, we will put more focus on OpEx, we want to see productivity and scalability impact in our cost base going forward. We have a number of levers in our toolbox. Examples are, for example, fuel efficiency. We of course, have been doing a lot in terms of fuel efficiency during the past years already. We will be turning every possible stone on that one, and that is also an important part of our sustainability agenda. Another example is on-time performance, measured especially by arrival punctuality.
We will be putting even more focus on that one. While that is of course, good customer service, we estimate that that will be enabling us to use our resources more optimally and then of course, by definition, will mitigate possible customer compensations coming from E.U. 261. Digitalization and automation of processes is an important part of this agenda, together with overall cost consciousness. We will be elaborating on this agenda in our Capital Markets Day that will be taking place on the 12th of November.
Moving on, I already mentioned that the impact of fuel price, taking currency and hedges into consideration, was EUR 12 million during Q3. In terms of emission trading, the emission trading cost for Q3 increased with EUR 2.2 million, and that's included in the fuel cost. The hedging ratios you see on this slide as well, basically policy on that one remains intact. When we look at the balance sheet, there's not much to say about the balance sheet. It is very stable as it is.
We have a strong cash position, and that cash position we will be using to finance our investments going forward, especially the upcoming deliveries of the A350s during next year. We are all in all investing, and then the investment amount during this year is EUR 480 million. Going forward, it is all about sustainable profitable growth for us and mentioned productivity measures around cost are important parts of that agenda.
We also have been, during the quarter, renewing our distribution strategy, launching new finnair.com website with some early encouraging results, especially on the conversion rates, and then hopefully in time boosting our digital sales, ancillary sales. We have introduced our new distribution capability partner program recently and are currently onboarding travel agents to that program. We are introducing new exciting destinations. We just recently announced Summer 2020 service to Tokyo Haneda, which we estimate will be the crown jewel of our network.
We are opening next spring also a service to Busan as the first European airline in to the second biggest city of South Korea. Then in a couple of weeks, we will be opening the service to Daxing Airport in Beijing. Also, Sapporo and Punta Cana are part of the openings for the winter. Sapporo demand actually has been quite upbeat, especially originating from the Japanese market. We're constantly working on sustainability. During last quarter, we flew biofuel flights financed by our Push for Change program, where customers are participating.
We also recently announced that we will be joining a Nordic initiative to promote electric aviation. In terms of outlook and guidance, we stick to our guidance in terms of capacity and in terms of the operating result range. When you look at the accumulated EBIT for the first nine months, it's fair to say that the odds are that we will be rather towards the lower end of the range rather than the high end of the range.
I stated already, on 12th of November, we will be having our Capital Markets Day, where we will be going through in more color and in more detail our strategic direction going forward, including the renewed long-term financial targets. I stop at that. Thank you.
Thank you, Topi. Now we have time for questions. I'd like to remind you that we also have Chief Financial Officer Mika Stirkkinen here with me to answer them, please go ahead.
Ladies and gentlemen, if you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, press star one if you would like to ask a question. We will now take our first question from Pasi Väisänen from Nordea. Please go ahead. Your line is open.
Thanks. This is Pasi Väisänen from Nordea. Just going back to the cargo and the kind of situation there. Did you actually say that the yield in cargo was down 15% in the third quarter year-on-year? What are actually the countries you are facing the cargo problem? Is it Germany, U.K., or China? Could you actually elaborate that a little bit? That was my first question. Thanks.
The yield reference was more a reference to what we see on the market on the overall. Now, when we go into the yield performance of our business, if okay, I come back to that, the exact yield. As you can see from the figures, the absolute revenue declined while the available ton kilometers increased double-digit. The revenue per available ton kilometer declined by roughly 14%.
Okay. Yes. Actually, did you say that you are actually kind of waiting a bit more on cargo environment in the fourth quarter or remaining part of 2019? Where actually this kind of view is coming from? When looking at the kind of situation in Hong Kong or in Central Europe or even on global basis, it's extremely hard to see that how come that the kind of overall economic environment could actually get any better than it was in the third quarter?
Cargo market seasonality, firstly, not the same way as the seasonality of the passenger traffic. In cargo market, the biggest period in terms of sales is Q4. We see that versus last year, the difference is roughly the same as in Q3, since last year, Q4 was way higher than Q3 last year. That's the reason for that.
Exactly. I think that we will need to be very specific on this one. When we are talking about seasonality within the year in cargo business, as Mika was stating, Q4 is the sort of typically the most strong quarter in cargo business in terms of volumes. As you rightfully point out, if we look at sort of longer-term demand trends in cargo business, we look at the sort of global macroeconomic outlook, for example, the impact of the trade wars, we are looking at a subdued market. That we see a shift in our operating environment where some of these global uncertainties have now translated into slower growth. That is, of course, impacting all of the businesses out there, also us and also our cargo business.
Okay. Yeah, thanks. If I may continue with this kind of a decline on the discount rate you have been using for the coming cost items. I guess it's fair assumption that it's not the kind of a cash flow item, but I guess the higher cost base is going to stay in your reported figures still when looking at the coming quarters. Actually a few ones more. One question related to growth in next year or next two, three years period. You actually said that you are going to receive kind of a close to market growth when looking at Finnair.
What's the figure you are referring at with the market growth seen in 2020 and 2021?
I think that, if I start from the U.S. five-year government bond discount rate, you're right that's not a cash flow item, and it is a little bit of a technical item. Some might call it even a one-off. As stated, we have our accounting practices, and we are following those. When we look at the sort of interest rate outlook, I think that, of course, there's always some changes. That outlook is not going to change materially soon. You are correct in your assumption that this is going to stay there for a while.
When we look at the growth part of your question, when we look at next year, the upcoming years, what we estimate, in terms of market growth, in those markets relevant for us, we would be talking about mid-single digits, plus, minus, on that top line.
Yes, thanks. The final one, if I may, related to CMD you are going to hold in near future. When kind of hearing your cost-saving targets. Are we going to see a kind of a cost savings program launch on to CMD even? Because it actually was not practically included in the third quarter earnings announcement today.
Yes , we will be elaborating on this agenda in our Capital Markets Day. We will be presenting a holistic, balanced strategy, looking into revenue, looking into cost, looking into building competitiveness through customer experience, keeping in mind that employees are a big part of building competitiveness in a service business. As part of this holistic agenda, we will be addressing costs. As I stated, we think that we have plenty of opportunity to improve productivity by continuous improvement measures.
Okay, great. Thanks. That was all.
As a reminder, ladies and gentlemen, if you would like to ask a question, please signal by pressing star one. We will now take our next question from Achal Kumar from HSBC. Please go ahead. Your line is open.
Hi. I just want to understand a bit more on the trading in different regions, North America, Europe, Asia. I can see there's a significant change from what was discussed and elaborated in the last quarter. For example, if I take in Europe, in the second quarter, your yield was down. When I asked about that despite Norwegian airline cutting capacity, which is positive for you, why the trading should not have positive impact. You said because it's not just directly related to the capacity, it is also related to how the competitors are pricing.
Now that has reversed, we can see the positive RASK. Has the pricing changed by the competitors? How that happened in Europe? Similarly in Asia, actually, you are saying, of course, there is an impact from Hong Kong. There is an impact from the competitor, Juneyao airline, you said. Obviously, if I see the load factor is broadly down 2.3%, which is similar to what was there in the last quarter, and yet your RASK was positive, and now it is quite a bit significantly down 6%. How the pricing has changed in Asia, Europe, and similarly in North America? That is my first question. If you could please help on that?
Mika Stirkkinen here. If I start with Asia, Hong Kong played a major role in Q3. On top of that, we saw some softness in traffic flows from Europe to Asia in general. You need to remember that the bulk of the business in Asia, the Asian traffic category in Q3 comes from Asia and Europe traffic flows. The softness in Europe to Asia flows played a smaller role. The Hong Kong, especially Europe to Hong Kong was quite soft, especially latter part of the quarter. Okay?
Yeah. What I would like to add on that one, if we look at the Asian traffic or the overall, I think that the Hong Kong issue we already covered, and there we will need to remember that we have been adding quite significant capacity to the Hong Kong route. We are flying two times per day with A350. From our overall Asia space, Hong Kong accounts for 7%, and in the Asian traffic category, Hong Kong accounts for 14%. That's it. The other part was the Shanghai-Juneyao, which is a net positive to us, but the positive side is visible in the European traffic category.
The Europe-Asia softness that Mika mentioned, I think that is also something that can be ring-fenced to some markets there, especially Germany. The corporate demand from Germany is visible. If we put those three items aside, I think that the overall Asian traffic category actually was quite okay. That's the way we look upon it. The European competition.
Yeah.
Do you want to start on that one, Mika?
If you look at our Q3 in terms of European traffic category, the growth in capacity was 4.9%, and the revenue grew by 10.1%. I think the kilometers grew by 11.9%, so it actually didn't come from the yield. We were not aggressively pricing. The demand was robust there, and there were a couple of reasons behind. Market capacity was flat, basically, during the quarter, and our capacity grew. Our market share increased. Last year, in 2018, there was extremely good weather in Finland in July, so the comparison year effect is there also.
On top of that, the revenue management system, what was implemented last year, it did start to show positive signs in the revenues, and that was visible in the traffic category Europe.
The North America?
North America, well, the capacity growth 28%, revenue growth 26%, RPK plus 33%. It was quite a positive performance. Whenever you open a new route like LAX for us, there's always a kind of, let's call it inverse honeymoon. It's not working immediately, but I have to say that the LAX surprised at least me personally positively. It's been positive in terms of profitability already for the second or third month of the operation. Q3 was good overall in North America. When you look at the loads, they were really robust there.
Right. While I am on this point, I also want to understand two more things. One, now in Asia, while you said that it's Europe to Asia, which is probably softer and that had an impact on the yield, on the RASK. Going ahead, if the euro continues to depreciate against Asian currency, do you see a bigger impact will continue? That impact will continue when that should be the case. Do you see that? Second thing, are you planning to pull the capacity out of HK, given that the uncertainty around in that region?
Are you expecting to pull back the capacity out of HK? Going on Europe, I also wanted to understand how the competitors' pricing is. You said that pricing is not aggressive. How are the competitors' pricing you see in Europe, especially our Nordic markets?
When it comes to our capacity on the Asian markets, we are in it for the long term on the Asian markets. Therefore, we are gradually, consistently building our presence in Asia. Therefore, we will stick to that strategy, and we take that into consideration in our capacity allocations. When it comes to the impact of currency to the demand, just by observing the market, our take on that one would be that probably the impact of the currency has been relatively limited on the demand so far.
I think that the phenomenon of Q3 RASK on Asia can be sort of ring-fenced and identified on the points that we already covered. Because you want to comment on the competitive pricing in Europe.
Overall, the pricing is very difficult to comment overall in Europe because there are several sub-markets within Europe. There are markets which are really corporate work travel purpose markets, and there are markets which are leisure travel purpose markets. Those vary or can vary quite a lot. Even the same competitor can price the same route as a work travel purpose market, and depending on the time of the day and day of the week differently.
Generally, you can see that if there's a so-called low-cost carrier, they price maybe a bit more aggressively, and if you have a, let's say, legacy carrier, they price a bit less aggressively. However, those have converged quite a lot lately. There is some effect in the European traffic category due to the E.U. chairmanship. Finland is in H2 the E.U. chairman. There is some effect in the Europe to Helsinki travel due to that.
Right.
That will continue also in Q4.
Okay. Understood. I'm so sorry. I have a few more questions, if I may. I'm really sorry for the long list of questions, as usual. I also wanted to understand a couple of things. One is, you highlight about the weakness in the corporate demand, how do you see the corporate demand elsewhere? I mean, you already discussed about the corporate demand ex Germany, you said. How do you see the corporate demands elsewhere? Secondly, I also wanted to understand about the impact from flight shame.
What sort of impact are you facing, clearly visible in the Nordic market? How do you see that? The third thing I wanted to understand a bit more about the cost. You have quite a significant focus on the cost, the cost this quarter have reversed. I mean, last quarter the unit cost was down significantly, now this quarter, the costs are up. Given that your fuel cost, you have the fuel hedges and most of the hedges are out of the money, how do you see your unit cost behaving going to the next two quarters? Thanks.
Okay. Thank you for the questions. We like the questions. Because you start on the corporate, I can take flight shame, and then we share on the costs.
Yes.
On the corporate, the grimmest corporate market we see is Germany, definitely. On the other hand, in German markets, the leisure segment has performed nicely. On the other hand, if we look at our top 10, top 20 corporates, it's surprisingly green overall. I would say overall it's varies the corporate development of the year-on-year.
No big news to any country.
Naturally the question is that whether that German disease spreads. No major signs of that.
In terms of flight shame, I think that what we experience in our operating environment, especially in Northern Europe and in the Nordic countries, is that the climate change obviously is a hot topic in the overall society. Our customers are very interested about this one. There are many questions, and customers are very interested about how to make aviation more sustainable, and we are definitely working on that one all the time.
As you see from our traffic figures and number of passengers, we don't see any impact on our traffic figures or the number of passengers coming out of the flight shame. Q3 number of passengers was record high for us. Number of passengers increased with 12%, and as such, we are one of the fastest-growing, if not the fastest-growing European airline for the time being. I guess that tells the story. At the same time, we do realize that we have an obligation to work with more sustainable aviation, both short and long term, and that we will be certainly doing.
Finally, on the cost, please.
The cost of the unit. Could you just refresh our memory, the specific point that you had around unit cost was?
I just want to say that, you had a focus on the cost, you want to cut the cost, in the last quarter, while the unit cost was down significantly, this quarter, the unit cost is up. Especially, of course, I can understand the Forex impact, on the other side, the fuel hedges which you have are out of the money. In that scenario, how do you see your unit cost behaving in the next couple of quarters? Obviously, the Forex impact will probably continue. In the overall scenario, how do you see the unit cost behaving for you?
We don't disclose the future unit cost development as such. However, there are a couple of drivers there behind the unit cost increase. Naturally, volume. Whenever we grow our volume, our volume-based costs increase. The volume driver might be passengers, flights, our cycles, ASKs, and so on and so forth. We have currency. When you look at our report, you see that we are short on dollar, we have more dollar-based costs than dollar-based revenues. Whenever dollar appreciates, our cost base versus the revenue line increases.
Then the last year, in Q3, we had EUR 27 million of hedging gains on the fuel cost line. This year in Q3, we had a EUR 0 million gain on the hedges. In the comparison period, we had a really major gain, and now it's flat. As you pointed out, when you look at our notes, you can see that the fair value from our jet fuel hedges is negative by EUR 53 million. On the other hand, the dollar hedges are in the money.
Exactly. What I would add to that one is that when you consider the CASK figure during the next quarters, of course you need to remember the CASK seasonality.
Right. Understood. Thank you so much, so sorry for the long list of questions.
No, as I said, we appreciate them a great deal, thank you for the questions.
As a reminder, ladies and gentlemen, if you would like to ask a question, please signal by pressing star one. We will now take our next question from Jaakko Tyrväinen from SEB. Please go ahead. Your line is open.
Good afternoon. Ladies and g entlemen. Next year, some capacity growth. Where are you planning to put the capacity growth?
Sorry. If we are supposed to hear something, we actually cannot hear a thing.
Okay. Can you hear now?
Yeah. Now we hear a lot improve.
Okay.
Sorry about that.
Well, I was asking regarding still about the next year capacity outlook, and could you elaborate bit more where are you planning to put the capacity growth of 5%? Will it be equally weighted with Europe and the long hauls, or more on the long hauls and the virtual zero on the European routes?
We have told that we will add two more A350s next year in H1. You can see that we have told about the new routes, Dar es Salaam, Busan, Haneda, Sapporo. What we haven't 100% announced yet is the full summer 2020 nor winter 2020 schedule. Unfortunately, I can't give you the full picture of the capacity development. I guess you can do some guessing that if we take delivery of two wide bodies and we have nothing on the narrow body delivery schedule, you can guess.
Right. Excellent. That's enough. Thanks. Regarding You mentioned that you're benefiting from, or you're seeing that Norwegian is cutting their capacity. Could you elaborate a bit more how much you are seeing that they would cut capacity for the winter season from Helsinki?
I think that is probably a question for Norwegian.
You see the numbers on our European traffic category, and you see the market share development. I think that there's common knowledge on the marketplace also based on the winter schedules, that capacity will be adjusted by some of the competitors. It is impacting our competitive environment on the short term, and that's where we are. Of course, medium to long term, we will need to remember that this is a competitive industry and therefore, capacity has its way to find itself to new markets as well. That's something that we need to keep in mind.
One more addition to that. I don't know how closely you follow the published schedules, for other airlines, we can see the capacity of our beloved peers on a weekly basis. That's the intel we get and that's basically all public information, you can do it yourself as well. The thing there with some of our competitors is that they change the capacity almost on a weekly basis, it's difficult to draw any conclusions based on that.
Of course, perhaps needless to remind, when we look into the capacity outlook for 2020 on the narrow body side, of course the return of MAX 8 traffic will be also something to consider. Although, in European airspace, the MAX 8 impact will be somewhat limited.
Right, thanks. Still a few words regarding the North Atlantic growth, which is quite rapid for you guys. Where do you see the demand coming from, given that you are growing 30% versus previous year? Is it coming only from Finland and from the point to point Finland, or is it somewhere else?
Well, as towards East, we have lots of transfer passengers buying East. The same applies to West, not fully to same extent. That's one thing. Second is that we have a really good cooperation through our Atlantic Joint Business cooperation together with American, BA and Iberia. We get a good network connectivity through our partners. Historically, we have got quite a nice feed from Russia, Baltic States, and now the new Los Angeles routes. There we have one of the best connectivities from Northern Germany.
Actually our sales from Northern Germany has increased quite a lot to Los Angeles. Basically, the demand for the North American traffic is probably more diversified than you would think.
Yes. Okay. Interesting. Thanks. As a small item regarding the sales and marketing costs, which were significantly up year-over-year, could you give a bit more flavor what was the main driver behind there?
Two reasons.
Will that continue or is it a one-off?
It will continue. Two reasons. One was there was a credit card cost increase due to the mix effect. There were more usage of a bit more expensive credit cards. The main reason was that we have talked about our distribution strategy and changes to the distribution. There, in connection with the freedom of pricing we have now, the unit cost of distribution has increased a bit.
Okay. Understand. Well, that's all from my end. Thank you.
Thank you for the questions.
As a reminder, ladies and gentlemen, if you would like to ask a question, please signal by pressing star one. It appears there are no further questions at this time, so I would like to turn the conference back to our presenters for any additional or closing remarks.
Thank you all for your questions, and many of them we are looking forward to discuss with you in connection of our Capital Markets Day or at the latest in connection of our full year results early next year. Wish you all a nice afternoon.
Thank you.
Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.